Regulatory

The Standardised Approach to measuring counterparty credit risk (SA-CCR) was proposed in 2014 by the Basel Committee as an alternative to the Current Exposure Method (CEM) for measuring derivatives risk. While not perfect, the SA-CCR represents a substantial advance over the CEM and should be adopted in all jurisdictions. Delays have already led to unnecessarily…

As US deregulation moves into gear, international regulators are voicing their deep concern with the breakdown of the attempted finalization of Basel III. Meanwhile, the US Congress pushes ahead while even some US regulators aren’t happy. Here’s how the camps are breaking down.

NEX’s recently released report on the Securities Financing Transactions Regulation starts with an apt quote from an exhausted UK voter facing the 2017 election: “You’re joking! Not another one. Oh, for God’s sake. I honestly can’t stand this.” The statement accurately sums up the way the financial industry is feeling about SFTR after EMIR, MiFID…

Manmohan Singh and Zohair Alam of the IMF have written an important white paper “Leverage—A Broader View” (March 19 2018, IMF Working Paper WP/18/62) that looks at off-balance sheet leverage. We’ve covered Manmohan Singh’s work for years with good reason – he is often a leading thinker on leverage and collateral matters. This time is…

Randal Quarles, Vice Chairman for Supervision at the Federal Reserve spoke last month at the American Bar Association Banking Law Annual Meeting. The speech, “Early Observations on Improving the Effectiveness of Post-Crisis Regulation” laid out what he was thinking about for bank regulation going forward. Meanwhile, a new proposal from the Fed yesterday suggested revisions to…

We’ve been reading the numbers of bankers leaving Brexit (4,000 for Paris, 1,000 for Frankfurt) and something has seemed amiss. EU regulations require more than a token presence in order to consider that a branch is active on the Continent, but is headcount the right measurement? In a technology-dominated market, we propose three different metrics…

The Economic Growth, Regulatory Relief, and Consumer Protection Act passed the US Senate last week with important roll backs of the Volcker Rule and US Leverage Ratio. This is the first step towards amending the 20% of rules that must be changed in Congress (the other 80% can be changed by regulatory agencies acting without…

The US Treasury has released its response to an Executive Order from April 25, 2017 that suspended the Orderly Liquidation Authority (OLA) under Dodd-Frank. In its new publication, the Treasury recommends a new form of bankruptcy but keeps OLA as an emergency backup. We ask how much this plan matters in the current market context.

In a report released this week, the Basel Committee on Banking Supervision evaluated the implications of fintech developments for banks and supervisors. This healthy analysis came up with five scenarios for how fintech firms and banks will compete and interact. While all five are viable, only one stands out as the most realistic.

The Bundesbank’s Dr. Andreas Dombret, responsible for banking, financial supervision and risk control, is presenting a vision of Europe’s financial future that should be heeded. We track some of his recent speeches to capture the main points.

Regulators have made a call for substantial transparency in the form of the Securities Financing Transaction Regulation (SFTR). The data that must be delivered to trade repositories is comprehensive, patchily available, and requires a new level of internal data management that has not yet been considered at the majority of firms. A guest post from…

MiFID II went live on January 3, 2018, but that doesn’t seem to be the end of the story. Keeping with the European Commission’s theme of “regulate first, refine later,” there is every reason to think that this regulation will continue to change. A guest post from Natixis.

In a post-crisis era, Europeans must focus on efficient and smart regulation in Securities Financing Transactions (SFT) to support competitive financial markets. This can be achieved but requires regulatory attention to solve several specific and identifiable issues.

The Federal Reserve Bank of Minneapolis has released a plan to end Too Big to Fail (TBTF) on a comprehensive basis. The choice is again between strengthening bank balance sheets and permitting banks to engage in transactions that provide liquidity and capital to financial markets and the real economy. The Minneapolis Fed has come down…

EMIR wants CCPs to hold more margin, in effect making CCPs into virtual fortresses. But the costs associated are high and the potential to push risk into markets or firms is real. We examine ESMA’s latest consultation paper draft on anti-procyclicality margin measures for CCPs to better understand EU regulatory thinking.

As everyone connected to the Internet or paper media knows, the US is close to passing a massive tax reform package that offers some of the most substantial changes since the 1930s. In order to prevent tax avoidance, one part of this taxes companies moving money to overseas affiliates; financial services companies would see an…

The Basel Committee on Banking Supervision released their “final” Basel III post-crisis reform documentation last week, and there is a lot to unpack. Already, the Quantitative Impact Study shows that G-SIBs will need an additional EUR 55.4 billion in Tier 1 capital to meet the new rules. We are sorry to report that in our…

There has been a lot of talk lately about recalibrating the Leverage Ratio, especially in the US where the enhanced Supplementary Leverage Ratio (eSLR) of 5% for holding companies and 6% for banks means that this is why business activities stop. While it’s easy to say “recalibration,” this could take many forms in practice.

It’s been a brisk week for interesting regulatory announcements and discussions. This edition of regulatory roundup highlights key points for collateralized trading, including thinking about the direction of the Federal Reserve, LIBOR competitors and next steps for Asia to become more reliant on market financing, and less reliant on bank financing, for regional economic development.

The Fundamental Review of the Trading Book (FRTB) – part of the big Basel III master plan on bank balance sheet, market risk and operational risk management – may be losing steam as major economies stall on adoption. Like the NSFR before it, we’re seeing hints that the FRTB may get placed into limbo.

There has been discussion in recent months about the possibility of large carve-outs in the US Supplementary Leverage Ratio; this follows years of carve-outs in the European version of Basel III. The most recent ideas, including taking US Treasuries out of the Leverage Ratio, open a new window for regulatory races to the bottom, backsliding…

In the strongest words that we’ve seen used by a leading regulator in a long time, CFTC Chairman J. Christopher Giancarlo today roundly criticized EU plans to regulate non-EU financial entities. His published commentary may leave you wide-eyed.

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The US Treasury has released its third major report on core principles for financial markets. The first two covered capital markets and banks; the latest is on asset managers and insurance companies. This report has some important material for not just the future of US asset management and insurance, but also securities finance, collateral and…

Who is winning the digital disruption contest in capital markets? The Economist recently published an article examining price to earnings ratios (PE) for companies and market segments that have been the primary targets of disruptive technology – including banking. They found that PE ratios in the financial sector show little impact from digital disruption. This…

Last week the US Treasury released “A Financial System That Creates Economic Opportunities: Capital Markets,” part two of their major review of regulations in financial markets. Here’s our analysis of the report for its potential impact on collateralized trading activities.

The Basel Committee on Banking Supervision has a couple of big problems related to the Net Stable Funding Ratio. First, they created terrible regulation that they now have to figure out how to get the world to accept. Second, the US is officially delaying and Europe is said to delay implementation pending further analysis. To…

The International Swaps and Derivatives Association (ISDA) has resumed its annual survey on margin. Initial Margin (IM) and Variation Margin (VM) requirements on certain types of derivatives contracts are now coming into larger effect across the industry, with the largest Phase I firms coming on-line in September of 2016.

The US Senate committee on Banking, Housing and Urban Affairs recently held hearings on Fintech and regulations. The speed of Fintech making a tangible impact in financial markets is accelerating; the hearings were meant to help Senators understand how much risk this represents and what kind of special regulation should the result.

Following moves towards a banking union (2012), the rupture of Brexit (2016) and major initiatives like MiFID II (coming to fruition in January 2018), the European Commission has announced its latest big idea: “Creating a stronger and more integrated European financial supervision for the Capital Markets Union.”

Barclays is setting its sights on returning to securities finance prominence. According to reports, Barclays’ current ability to try to recapture its one-time leading industry role in equity and fixed income financing is partly attributable to cost savings success through restructuring bank operations and technology into a standalone business unit called Servo. What may be…

Asset management may be considered a profitable business but the trend has recently been moving in the opposite direction. A new raft of challenges, ranging from MiFID II to the growth of passive investment strategies, has asset managers looking at cost optimisation in a new light. This article considers some of the headwinds and opportunities…

The quest to assign Global Legal Entity Identifiers (GLEIs) is a misguided effort to assign legal responsibility where none belongs, and ends up making suspicious actors in financial markets look more legitimate. GLEIs have been put forth as a way for the industry and regulators to develop a consistent way to report on who is…

The pillars of Federal Reserve thinking have crashed in 2017: Daniel Tarullo resigned in the Spring, and last week Stanley Fischer announced he would be gone by mid-October. For an institution that went through the Obama era with a strong and pretty consistent set of regulatory objectives, these departures mean a big turnaround. The impacts…

Capital markets are addicted to Excel. This ubiquitous piece of software has been the target of every major desktop application vendor for years. The goal is to obviate the need for traders, middle office and back-office users to use Excel to plug the gaps in their business processes. With all the effort against it, why…

The recently announced lawsuit against six US banks and EquiLend for collusion in US securities lending markets will require proving what collusion actually means, vs. what organizing for the betterment of the industry represents. We look at the definition of collusion and what will need to be proved under antitrust laws.

The International Swaps and Derivatives Association (ISDA) published a comment paper this month regarding stay protocols under the European Bank Recovery and Resolution Directive (BRRD). ISDA has strong concerns about proposed amendments to stay protocols – called moratoria under the BRRD – and the risks this introduces into markets. A big concern is the differences…

While there may be some excitement in the air about US deregulation, last week Federal Reserve Vice-Chairman Dr. Stanley Fischer eviscerated critics of Dodd-Frank by saying that deregulation would be “extremely dangerous and extremely short-sighted.” What is a realistic time table for any meaningful change?

Add a new stock manipulation concern to the list: Big Data. Every piece of information mined out of Big Data by algo systems is suspect, and subject to hacking and manipulation. In 2017, if you understand what an algo is looking for and how it might react to a particular tidbit of information, you could deceive…

The headlines say that the SEC reports little damage to liquidity from regulations, and this is going to influence both government and public opinion going forward. But the SEC measured liquidity against some factors to reach their conclusions, and explained their inability to get a full picture in other areas. Liquidity is not a cut…

In what may be a seminal ruling, the Securities and Exchange Commission (SEC) has said that a so-called digital token qualifies as a security under the Securities Exchange Act of 1934. This was a case involving a “crowd governance” scheme on a blockchain, called a Digital Autonomous Organization (DAO), that allowed investors to purchase tokens…

Overstock.com has been in the news recently, as it works to market its T0 short sale locates platform to the prime brokerage market. The twist with T0 is that it is based on blockchain technology, which inherently could eliminate the problem of “over locates” on hard to borrow securities. Is the T0 service about to…

Use the Current Exposure Method, SA-CCR, or just cut out margin from the Leverage Ratio altogether? Answering this question, and soon, is a core challenge and opportunity for global equity derivatives liquidity today. This Finadium report evaluates listed equity derivatives from the perspective of securities financing, and provides a primer on current conditions for collateral…

The Reserve Bank of New Zealand published a recent speech by Toby Fiennes, Head of Prudential Supervision for the bank, that included an in-depth analysis of the role of regulation in combating cyber threats. It has become rare in the current regulatory environment for an oversight body to reject an opportunity to create new regulation;…

Total Loss Absorbing Capital (TLAC) is a core element of the Basel regulatory capital regime, which sets minimum liquidity reserve standards for banks. Banks are now issuing qualifying debt instruments – TLAC bonds – but written into regulation and into the prospectus of this class of bonds are two growing problems no one seems to…

If you are uncomfortable with the idea of Artificial Intelligence, this idea will make you very nervous. In June of this year, Facebook announced through their Code blog that they are training AI agents (bots) to negotiate value transactions, such as the barter exchange of items.

The possibility has emerged that Japanese banks could lose access to GCF Repo(R), which would be a shame for both the banks and GCF liquidity and volumes. While still speculative for now, this is a case of overcautiousness and lack of trust at a time when US rhetoric on regulation has caused some global concerns.

Central banks are starting to signal exits from traditional and non-traditional stimulus responses to the Great Recession. The US and Canada have both turned the corner on interest rates, and have made reasonably strong statements that more rate hikes are likely. While these are good steps towards normalization, risk will need to return in order…